• Rural poverty and livelihoods

Rural poverty and livelihoods

While literature on microfinance best practices is readily available these days, less is known about the broader field of rural finance. Given their expertise in both microfinance and rural development, and the wide range of instruments they have at their disposal, Co-Financing Organizations (CFOs) have many lessons to share in this respect. As a first step, MicroNed, a Netherlands-based network created by Cordaid, Hivos, ICCO and Oxfam Novib, recently documented the experiences of its affiliate CFOs working on rural finance.    

Dutch CFOs follow three approaches to rural finance, namely:

• building financially sustainable Microfinance Institutions (MFIs) whereby both new and mature MFIs are prepared for semi-commercial funding
• supporting Member-Owned Microfinance Institutions (MOMFI), ranging from small autonomous groups to national cooperative networks
• supporting for the provision of financial services to the actors in the value chain, through parnerships with organisations or companies inside the chain or by financial institutions outside the chain
  

In the process, the CFOs use a wide variety of instruments in all three approaches, including grants, seed capital packages, guarantees, loans, equity and technical assistance. Some provide loans and/or equity themselves, while others work through specialised agencies. Overall, the CFOs take on different roles, acting as providers of funds, brokers and capacity-builders.

According to the report, although the CFOs have accumulated substantial experience with different models of rural microfinance and value chain finance involving multiple actors, their knowledge is not being shared. Microfinance officers must begin to view rural microfinance from a wider rural development perspective, and rural experts must start to look at value chain development through a financial services lens for more innovative and technically sound solutions in rural finance to emerge. CFOs also need to look beyond MFI performance in order to take into account the livelihoods of the clients and the markets in which clients or potential clients are involved.

Ultimately, with microfinance in urban areas being less risky and more profitable, donors, investors, MFI staff, board and shareholders must be committed to reaching out to rural areas. This means being prepared to forego short-term achievements of financial sustainability or profit maximisation if necessary. 

The report includes case studies of the three approaches to rural finance being used by Dutch CFOs.

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